Panama Papers Perfectly Exemplify Exploitation of Wealth and Power in Petro States

Revelations from the Panama Papers data leak have had a major fallout across the globe, and in particular, a number of oil-producing states and officials tied to oil have been exposed for financial arrangements to hide accounts and assets offshore. The news this week, which came as a bombshell, is another reflection of the corruption, malfeasance, and opaqueness which is common to many countries that rely on oil revenues and whose officials use the countries’ resources to build their own wealth rather than develop them for the greater good. Of course, while those listed might not have necessarily committed illegal activity, the data shows how those with close ties to the oil sector in producing countries have exploited loopholes and tried to avoid accountability.

The news this week, which came as a bombshell, is another reflection of the corruption, malfeasance, and opaqueness which is common to many countries that rely on oil revenues.

In the more than 11 million documents leaked, high-ranking officials in Russia, Saudi Arabia, Brazil, Venezuela, Nigeria, Angola, Qatar, Sudan and Congo have been named as part of the global elite who have shielded their wealth from oversight.

“A lot of this comes down to how wealth and power are exercised in rentier states,” David A. Weinberg of Foundation for Defense of Democracies (FDD) told The Fuse. “Rentier states, in a nutshell, end up with a strong concentration of wealth in a few hands. There’s a tendency toward sustained authoritarianism, and those who exercise power seek to protect their wealth from certain kinds of oversight in their own system, because power can be exercised capriciously and vindictively.”

The Panama Papers, a project of Washington-based International Consortium of Investigative Journalists and German newspaper Sueddeutsche Zeitung, expose not just authoritarianism and corruption throughout petro states. Using secretive offshore accounts, which may or may not be used for criminal activity, is an activity that runs deep among the global elite from countries of all different varieties, as the resignation of the Prime Minister of Iceland as a result of the Papers and the exposure of soccer player Lionel Messi show. But there is indeed a greater concentration of this activity in oil-heavy economies.

“A lot of this comes down to how wealth and power are exercised in rentier states.”

Not only do the elite use offshore havens to avoid scrutiny and taxes in their home countries; they also seek to protect their assets against the risk of power changing hands. With the desire to hold onto their wealth when and if they lose power, they distribute their holdings in safe havens offshore. For instance, both the King of Saudi Arabia and its Crown Prince used offshore accounts, and both have faced the possibility at certain points that they would be disinherited. King Salman stashed assets with overseas shell companies used for real estate assets and a yacht. According to FDD’s Weinberg, Saudi Arabia has long demonstrated such opaque ownership dynamics. For instance, Saudi Arabia, the world’s largest producer of crude oil, as a state has sought secrecy regarding its massive investments in U.S. debt, while the Kingdom’s central bank’s overseas holdings are heavily but discreetly invested in conservative U.S. assets and considered “one of the region’s most secretive investment funds,” according to a CNBC commentator.

Leaders in other oil-producing states have acted similarly. Former Iraqi Prime Minister Ayad Allawi, former Qatari Prime Minster Hamad bin Jassim a-Thani, and former Sudanese President Ahamad Ali al-Mirghani all used offshore companies for their own purposes.

“It’s not surprising that they set up these overseas accounts given the risks to their positions of power,” said Weinberg, noting that all of the three regimes have a history of coups as well as turning on former officials who have fallen out of favor.

One of the main figures exposed in the whole Panama Papers ordeal is Vladimir Putin of Russia, another of the world’s top oil producing states. Critics of President Putin, who is almost universally demonized in the West, have more ammunition to show how he and those close to him have thrived with wealth, assets and luxury at a time that his country is undergoing economic turmoil and political repression. Associates of Putin, according to the leaks, have moved as much as $2 billion through offshore havens.

Beyond the Middle East and Russia

The activity goes beyond the Middle East and Russia in regards to oil. In Africa, Angola’s former oil minister, a key official previously with Congo’s national oil company, and a former governor of the oil-rich Delta state in Nigeria have all been connected to the Panama Papers. Major officials in sub-Saharan African countries that are flush with hydrocarbon resources have become massively wealthy from oil money, further exemplifying the disconnect between the powerful elite and impoverished citizens in many parts of the continent.

The one place where the leak may be connected to actual corruption, rather than only sheltering money, is Brazil. Many who are embroiled in the scandal surrounding the country’s oil company Petrobras have also been entangled in the mess surrounding offshore documents.

“Political backlash won’t be as big as elsewhere. There have already been so many corruption scandals in Latin American that have come about recently.”

In the country’s largest scandal in decades, Petrobras contractors effectively overcharged the state-owned oil company for work, and then channeled kickbacks to pay politicians. The scandal sparked outrage at the country’s business and political establishment, with officials at the top of both Petrobras and the government implicated. President Dilma Rousseff has not been directly involved, although there are allegations her campaign benefited from bribes related to the Petrobras scandal—a vote to impeach her for other charges will occur on April 17. The future of Petrobras is currently up in the air because the country is in a state of paralysis due to political turmoil and lack of leadership. Even if Rousseff is forced out of office, the current Vice President, who would take over, is also facing impeachment charges over accusations of manipulating government accounts, similar to allegations against Rousseff.

The Panama Papers, however, will not likely cause a firestorm in Brazil since most what was leaked was already known.

“Investigators had a lot of the information even before the Panama Papers were made public,” Lisa Viscidi, Director of the Energy, Climate Change and Extractive Industries at the Washington-based Inter-American Dialogue, told The Fuse. “It gives a little more evidence such as some extra details and new names, but no one was too surprised.”

In Venezuela, the situation is similar, with officials from PDVSA implicated in document leaks, but no widespread outrage. Corruption has been rampant at PDVSA for some time and the U.S. government launched an investigation into misconduct at the Venezuelan company.

“Political backlash won’t be as big as elsewhere,” said Viscidi. “There have already been so many corruption scandals in Latin American that have come about recently.”

Long-term impact unclear

It’s unclear what the overall fallout from the Panama Papers will be. The fact that the global elite bend the rules for their own gain is no surprise, nor is it all that shocking that leaders in petro states hold a large concentration of wealth, and seek to hide it from their own systems. However, the trove of specific names and data surrounding the dealings of the rich and power that has been thrown into the public eye should enable some movement towards greater global transparency and integrity.

Stay Informed

Subscribe to our newsletter today!

The Fuse is an energy news and analysis site supported by Securing America’s Future Energy. The views expressed here are those of individual contributors and do not necessarily represent the views of the organization.

Issues in Focus

Safety Standards for Crude-By-Rail Shipments

A series of accidents in North America in recent years have raised concerns regarding rail shipments of crude oil. Fatal accidents in Lynchburg, Virginia, Lac-Megantic, Quebec, Fayette County, West Virginia, and (most recently) Culbertson, Montana have prompted public outcry and regulatory scrutiny.

2014 saw an all-time record of 144 oil train incidents in the U.S.—up from just one in 2009—causing a total of more than $7 million in damage.

The spate of crude-by-rail accidents has emerged from the confluence of three factors. First is the massive increase in oil movements by rail, which has increased more than three-fold since 2010. Second is the inadequate safety features of DOT-111 cars, particularly those constructed prior to 2011, which account for roughly 70 percent of tank cars on U.S. railroads. Third is the high volatility of oil produced from the Bakken and other shale formations, which makes this crude more prone towards combustion.

Of these three, rail car safety standards is the factor over which regulators can exert the most control. After months of regulatory review, on May 1, 2015, the White House and the Department of Transportation unveiled the new safety standards. The announcement also coincided with new tank car standards in Canada—a critical move, since many crude by rail shipments cross the U.S.-Canadian border. In the words DOT, the new rule:

Since the rule was announced, Republicans in Congress sought to roll back the provision calling for an advanced breaking system, following concerns from the rail industry that such an upgrade would be unnecessary and could cost billions of dollars. The advanced braking systems are required to be in place by 2021.

Democrats in Congress have argued that the new rules are insufficient to mitigate the danger. Senator Maria Cantwell (D-WA) and Senator Tammy Baldwin (D-WI) both issued statements arguing that the rules were insufficient and the timelines for safety improvements were too long.

The current industry standard car, the CPC-1232, came into usage in October 2011. These cars have half inch thick shells (marginally thicker than the DOT-111 7/16 inch shells) and advanced valves that are more resilient in the event of an accident. However, these newer cars were involved in the derailments and explosions in Virginia and West Virginia within the past year, raising questions about the validity of replacing only the DOT-111s manufactured before 2011.

Before the rule was finalized, early reports indicated that the rule submitted to the White House by the Department of Transportation has proposed a two-stage phase-out of the current fleet of railcars, focusing first on the pre-2011 cars, then the current standard CPC-1232 cars. In the final rule, DOT mandated a more aggressive timeline for retrofitting the CPC-1232 cars, imposing a deadline of April 1, 2020 for non-jacketed cars.

Oops!

We weren't able to sign you up for our newsletter.Please check your email address and try again.

DataSpotlight

The recent oil production boom in the United States, while astounding, has created a misleading narrative that the United States is no longer dependent on oil imports. Reports of surging domestic production, calls for relaxation of the crude oil export ban, labels of “Saudi America,” and the recent collapse in oil prices have created a perception that the United States has more oil than it knows what to do with.

This view is misguided. While some forecasts project that the United States could become a self-sufficient oil producer within the next decade, this remains a distant prospect. According to the April 2015 Short Term Energy Outlook, total U.S. crude oil production averaged an estimated 9.3 million barrels per day in March, while total oil demand in the country is over 19 million barrels per day.

This graphic helps illustrate the regional variations in crude oil supply and demand. North America, Europe, and Asia all run significant production deficits, with the Middle East, Africa, Latin America, and Former Soviet Union are global engines of crude oil supply.